Why it Matters:

Note that NOPAT uses only operating income -- the income before taking interest payments into account. For this reason, NOPAT is a crucial measure in a variety of financial analyses because it gives a clearer view of operating efficiency -- a view that is not clouded by how leveraged the company is or how big of a bank loan it was able to get. This is important, because those interest payments on debt reduce net income and thus reduce the company's tax expense. Thus, NOPAT simply looks at how ell a company's core operations did, net of taxes. Accordingly, NOPAT is also used to calculate Economic Value Added (EVA)It is important to note that some industries intrinsically have higher costs than others. This is why comparing NOPATs is generally most meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should be made within this context.

CONTENT LIBRARY

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